Stein’s law says that if something cannot go on forever, it wont.
But does a speculative bubble matter? The cryptocurrency bubble can be left to itself (tax evasion and criminal transactions aside).
Why shouldn’t we do the same for housing?
There are two general reasons why we should be concerned with a house price bubble.
The first is that, dangerously, housing is currently in the middle of a Minsky speculative bubble.
How close we are to the ‘Minsky Moment’ and the crash which follows one can never tell. But when a market goes into the downer it is likely to cause great distress to people and to the financial system. (Recall what happened in the US in 2008.)
The second Stein’s law is the longer it goes on the more people who suffer when it stops.
The sooner we ease out of the bubble, the less distressing it will be in the long run.
The second is that rising house prices compound economic inequality, especially against those who do not own their own homes.
This column deals only with the dangers of a speculative bubble. The distributional issue belongs to another column, although it is kept in mind here.
Perhaps there is a third reason.
Should public policy actively promote a speculative bubble in housing? It does in at least two ways.
First, the tax system favours speculation in housing over other sorts of investments.
The story is complicated and various powerful resolutions, such as a comprehensive capital gains tax, have been ruled out.
Recall that the Key-English Government tightened up on some of the loopholes in housing-investor tax avoidance in its first term and later introduced a limited ‘brightline’ capital gains tax for rapid housing turnover.
Do not be surprised if this government removes more loopholes.
The second promotion of the speculative bubble is the way we report house price changes.
Understandably real estate agents choose the statistic which encourages speculation. Thus, the current focus on the national median selling price up by 19.8% in October compared to a year earlier.
However, the Real Estate Institute (REINZ) also publishes a House Price Index (HPI), which covers the price of all houses and not just those sold. It increased by 13.5% in the same period, less – but still high.
The selection of houses being sold is different from the total housing stock and, not surprisingly, what is sold experiences bigger price increases than average
We need an official House Price Index.
A decade ago the government turned down a proposal for Statistics New Zealand to construct one. (As usual, the government showed little foresight of impending policy challenges. We also need an official Housing Affordability Index which recognises that the cost of unit debt servicing has fallen with lower interest rates.)
It would still show sharply rising house prices but be authoritative.
In the interim, we need to focus on the REINZ HPI.
The difference will become critical as housing prices stabilise.
Perhaps there should be a specific reference to housing price stability in the next Policy Targets Agreement between the Minister of Finance and the Governor of the Reserve Bank.
But how to stabilise them?
Removing tax loopholes and reducing the hyping of the market is a start.
But the key mechanism in a Minsky bubble is leveraged borrowing for speculation.
That causes the greatest havoc when the bubble pops.
On the other hand, borrowing for own-homing against one’s future earnings makes sense.
So the new LVR restrictions need to reduce the amount of highly leveraged borrowing within the housing market by requiring an increasing share of homeowner equity for mortgages beyond particular thresholds: for instance, 20% equity required for borrowing up to $800,000 (that is, for houses below $1m), and 40% equity for any borrowing beyond $800,000.
The immediate effect would be to continue to assist first home buyers while reducing overall leverage in the housing market. The longer-term effect would have price rises at the top of the market curbed (and that would reduce them in the middle of the market, again favouring first-time purchasers).
Meanwhile, we need to increase housing supply. Continue reading
- Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He holds positions in six New Zealand universities and has held them in overseas ones in Australia, Britain and the United States.
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